Sterling could outperform against the euro in the coming weeks because the UK is less exposed to the threat of Donald Trump’s tariffs, analysts think.
Traders are busy working out who the likely winners and losers from Trump’s disruptive trade policy, and most think the UK will come out better than the European Union (EU).
“The market expects the EU to have more to lose than the UK on tariffs,” Chris Turner, head of markets at ING said, suggesting this would support the pound.
Last week Trump said he would impose tariffs on the EU “pretty soon“, complaining that the bloc “takes almost nothing” from the US.
According to EU figures, the US goods deficit with the bloc stands at €156.6bn.
In contrast, UK-US goods trade is roughly in balance and while Trump said the UK was “out of line”, he was “sure” the problems could be worked out.
With tariffs becoming more and more prominent in driving movements in global currency markets, analysts expect sterling to grow increasingly attractive.
“The shift in market focus towards trade risks is leading to increased recognition of the UK’s greater resilience to direct tariffs than the eurozone,” analysts at Barclays said.
Similarly, analysts at Goldman Sachs said the pound could benefit from its “relative resilience to an escalation in US tariff risks”.
In contrast, many analysts expect tariffs to pile further pressure onto the EU’s already sluggish economy, which would prompt the European Central Bank into more aggressive rate cuts.
At the turn of the year the pound was hovering just below €1.21, before it slumped to near €1.18 in mid-January. It has since recovered to €1.20
“Trade risks remain a headwind for the euro. In addition, local macro releases remain uninspiring, supporting the case for a deeper cutting cycle by the ECB,” the Barclays analysts said.
While sterling may be a relatively safe bet for currency traders, the dollar is still expected to reign supreme in FX markets for the foreseeable future.
Analysts expect tariffs to strengthen the dollar’s safe-haven status. They will also reinforce inflationary pressures, which will force the Fed to cut rates at a slower pace.
“The heightened risk of wider disruption to global trade from further tariff hikes is a supportive development for the US dollar,” Lee Hardman, an FX strategist at MUFG said.